Does the Participation in the Microcredit Programs Contribute to the Development of Women Entrepreneurship at the Household Level? Experience from Bangladesh

Center for Microfinance and Development University of Dhaka CMD Working Paper 04 Does the Participation in the Microcredit Programs Contribute to the Development of Women Entrepreneurship at the Household Level? Experience from Bangladesh M. Jahangir Alam Chowdhury mjac (at) univdhaka.edu Abstract: The study intends to assess the impact of the participation in the microcredit programs in Bangladesh on women entrepreneurship development at the household level. The main objective is to see whether the participation in the microcredit programs help participating women to start their own businesses and to create employment for other people. The analysis is based on a household-level survey of 920 (N=920) households. The sample households have been selected randomly from the participants of top three microfinance instructions, Grameen Bank, BRAC and ASA, in Bangladesh. The results indicate that the participation in the microcredit programs does not promote women entrepreneurship at the household level. But, the results indicate that the same participation significantly increases capital of existing businesses of participating households. Keywords: Microcredit, Women Entrepreneurship Development, Bangladesh [Paper Presented at UNU-WIDER Project Workshop on Entrepreneurship and Economic Development, 21-23 August 2008, Helsinki] July 2008 Dhaka, Bangladesh Does the Participation in the Microcredit Programs Contribute to the Development of Women Entrepreneurship at the Household Level? Experience from Bangladesh M. Jahangir Alam Chowdhury, PhD1 Introduction Microcredit is essentially the dispersion of small collateral-free loans to poor people in order to foster income generation and poverty reduction through enhancing self- employment. Since its introduction in Bangladesh in the seventies, the use of micro-credit as a tool for poverty alleviation has become widely accepted through out the world in developing as well as many developed countries. In this paper I propose to evaluate the effectiveness of microcredit programs of three major microfinance institutions (MFIs) in Bangladesh-ASA, BRAC and Grameen Bank-in promoting women entrepreneurship development at the household level. The women entrepreneurship development has been defined as the ability of women to start businesses. The remainder of this paper is organized as follows. Section two is a brief discussion of the microfinance sector in Bangladesh. Section three outlines who participates in the microcredit programs of microfinance institutions. Section four describes the estimation strategy of this paper. The survey design is discussed in section five. Results are presented in section six. Conclusions follow in section seven. Microfinance Sector in Bangladesh Bangladesh has experienced an exceptionally rapid growth in the microfinance sector since 1990. Prior to 1990, only a handful of organizations were operating in the microcredit sector. Following the innovation and success of the Grameen Bank in 1 Dr. Chowdhury is Associate Professor in the Department of Finance and Executive Director of the Center for Microfinance and Development, University of Dhaka. 2 providing small collateral free loans to poor people for income generating activities, many NGOs adopted micro credit technology and started mobilizing poor people for micro credit activities. Some of these NGOs experimented with Grameen’s micro credit delivery system at the beginning and gradually they developed their own micro credit delivery system (For example, BRAC and ASA). Currently, apart from Grameen Bank, more than 1000 MFIs are operating micro credit programs and many more new ones are joining the micro credit revolution in Bangladesh. <<<< Table 1 About Here >>>> Although more than 1000 MFIs are providing micro credit in Bangladesh, the contribution by a vast majority of them toward total annual loans disbursement is insignificant. Based on the CDF statistics, 2004, three top MFIs – Grameen Bank, BRAC and ASA - contributed more than seventy percent to total membership, total net savings, cumulative loans disbursement and loans outstanding (Table 1). BRAC is the largest MFI in terms of membership mobilization. Until December 2003, BRAC had mobilized 4.1 million members, which was 21.3 percent of total. But in terms of three other indicators, cumulative disbursement, loan outstanding and net savings, the Grameen Bank was the largest. The Grameen Bank had cumulative loan disbursement of Taka2 191.44 billion, loan outstanding of Tk 16.82 billion and net member savings of Tk 13.31 billion. The cumulative loan disbursement of the Grameen Bank constituted approximately 41 percent of total, where as it was approximately 21 percent for BRAC. In 2003, the loan outstanding and net savings of the Grameen Bank were 31 percent and 45 percent of total respectively. In the same year, BRAC contributed 21.3 percent of total loan outstanding and 21.4 of total net savings. ASA in relation to these two MFIs is quite small in terms of the indicators as stated above. The share of ASA in total loans disbursement was 15.2 percent. ASA at the end of December 2003 had mobilized 2.3 million members. 2 The currency of Bangladesh is called Taka. In short, it is written as Tk. The current exchange rate is 1USD = 69.50Tk. 3 Who Participates in Microcredit Programs? Membership of the microfinance institutions, especially the Grameen Bank, in Bangladesh is limited to people who own less than half an acre of land, are not from the same family, have similar socio-economic status and are from same area. Khandker, Khalily and Khan (1995) argue that these criteria of group membership are important for better functioning of microcredit programs. The restriction of less than half an acre is imposed to restrict participation of rich people in the program. Morduch (1998) and Zaman (1997) raised question about the strict application of these criteria, especially land ownership of less than half an acre. Zaman found miss targeting of 28% in case of BRAC, which means that 28 percent borrowers had more than half an acre of land. Morduch found miss targeting of 30 percent in case of the Grameen Bank, BRAC, and RD-123. There is no doubt about the success of microfinance institutions, especially the Grameen Bank, in reaching poor people [Amin, Rai and Topa, (1999)]. Amin, Rai and Topa (1999) found that a poor household is more likely to join a microcredit program than a non-poor household. But some researchers, for example, Hulme and Mosely (1997), Hashemi (1997), and Rahman (1997), raised questions about the success of microcredit organizations in reaching the poorest of poor, who are also known as hard-core poor. Hulme and Mosely (1997) argue that the benefits of microcredit programs are unevenly distributed and for that reason, hard-core poor are largely left out. Hashemi (1997) finds that such microcredit programs like the Grameen Bank have failed to effectively target hard-core poor. Rahman (1997) found some problems from the demand side, which excluded hard-core poor from microcredit programs. In Bangladesh, formal sector financial institutions are gender biased. Although some banks have opened branches exclusively for women, those branches mainly collect deposits and provide a small number of loans. Prior to the Grameen Bank, women 3 RD-12 was a microcredit program operated by the governmental Department, Bangladesh Rural Development Board (BRDB). 4 constituted only less than 1 percent of total number of borrowers [Yunus (1998)]. This exclusion of women from the services of formal sector financial institutions motivated Mohammad Yunus, the founder of the Grameen Bank and the Nobel Peace Prize 2006 winner, to give preference to women in the Grameen Bank, especially for providing microcredit loans. As he writes [Yunus (1998)]: “In Bangladesh, if a woman, even a rich woman, wants to borrow money from a bank, the manager will ask her, ‘Did you discuss this with your husband?’ And if she answers, ‘Yes’, the manager will say, ‘Is he supportive of your proposal?’ If the answer is still, ‘Yes’, he will say, ‘would you please bring your husband along so that we can discuss it with him?’ But no manager would ever dream of asking a prospective male borrower whether he discussed the idea of a loan with his wife, and whether he would like to bring his wife along to discuss the proposal. Even suggesting this would be an insult! Having complained for so long that banks discriminated against women, I wanted at least 50 per cent of our projects’ (i.e. the Grameen Bank Project) borrowers to be women.” Therefore, Professor Yunus wanted to have at least 50 per cent of the Grameen Banks’ members’ women. Staff and officials of the Grameen Bank have found women more motivated and compliant with rules and procedures. They also have found women more consistent in their concern for the welfare of the family. Women invest their loans properly and utilize income for the welfare of the members of the family [Hashemi and Schuler (1997); Rahman, (1999); Goetz and Sen Gupta (1996), Pit and Khandker (1997)]. These reasons motivated staff and officials of the Grameen Bank to give women preference. As of February 1997, 94 per cent of 2.07 million Grameen Banks’ members were women. Helen Todd (1997) argues that during the mid-eighties the poor loan recovery performance of male centers4 compared to women centers5 encouraged the 4Grameen Bank centres with male members only, 5Grameen Bank centres with women members only, 5 Grameen Bank to give women preference for its microcredit activities.

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